I believe Tolkien said that he was meant to be a personification or representation of the countryside; I don’t have the quote to hand. We’ve had some folks here speculating that he was a Maia; I’m up in the air about it. That seems logical though. It would still be in keeping with what Tolkien said, I think.
I feel like he’s a spirit of the earth/nature, before the darkness came. He’s got a great power born of innocence. He may be the most hobbity because he’s part of that land, or maybe hobbits are hobbity due to living in the area of Bombadil.